Question

1) Slacker Co. decided to raise $1,000,000 through a bond issue. These bonds will mature in 10 years and the associated coupon rate for the annual interest payments is 7.0%. If the market rate is 8.0%, what price would we expect for these bonds?

2) Please prepare the Slacker Co. journal entry to reflect the bond issue in the previous question .

3) If the market rate in question #1 was 6.0%, what would expect for these bonds.

4) Please prepare the Slacker Co, journal entry to reflect the bond issue in the previous question.

5) Please prepare the Slacker Co. journal entry to reflect annual interest payment associated with the bond issue in questions #3 and # 4

Answer 1

Requirement 1:

Present value of the Interest payment	$469,706
[70,000 x 6.71008 Present value annuity factor (8%, 10 years]
Present value of the face value	$463,190
[1,000,000 x 0.46319 Present value factor (8%, 10 years)
Bonds issue price	$932,896

Requirement 2:

Account title and explanation	Debit	Credit
Cash	$932,896
Discount on bonds payable	$67,104
Bonds payable		$1,000,000
[To record issuance of bonds payable]

Requirement 3:

Present value of the Interest payment	$515,206
[70,000 x 7.360087 Present value annuity factor (6%, 10 years]
Present value of the face value	$558,390
[1,000,000 x 0.55839 Present value factor (6%, 10 years)
Bonds issue price	$1,073,596

Requirement 4:

Account title and explanation	Debit	Credit
Cash	$1,073,596
Bonds payable		$1,000,000
Premium on bonds payable		$73,596
[To record issuance of bonds payable]

Requirement 5:

	Account title and explanation	Debit	Credit
For #3	Interest expense [932,896 x 8%]	$74,632
	Discount on bonds payable		$4,632
	Cash [1,000,000 x 7%]		$70,000
	[To record payment of interest]
For #4	Interest expense [1,073,596 x 6%]	$64,415.76
	Premium on bonds payable	$5,584
	Cash [1,000,000 x 7%]		$70,000
	[To record payment of interest]